What is LMI?
What is LMI (Lenders mortgage insurance)?
Lenders Mortgage Insurance (LMI) is a fee charged by banks and other finance lenders when your deposit is less than 20% of your property’s purchase price. The point of the one-off payment is to protect the lender in the event that you, the borrower, cannot make the repayments on your home loan. Some people think LMI will protect the borrower if they default on their loan, however, this is not the case.
The reason banks and lenders require this type of insurance is because there is higher risk when the borrower cannot provide a big enough deposit. In some circumstances LMI can also help banks to lend out larger amounts but insure the institution against risk. Many Australians choose to pay LMI in the bid to get into the market sooner. While, others prefer waiting until they have more in the bank before signing on the dotted line.
Do I need the funds upfront?
You do not need extra funds straight away to pay for LMI. Lender’s mortgage insurance is taken out when you settle the property and is added directly to your home loan, so it’s not a fee you need to pay upfront. It is important to discuss LMI with your lender or bank when getting pre-approval for your loan. This will not only give you an idea of a rough cost but may allow you to increase your borrowing limit when discussing your options.
Why should I pay it?
It’s a common grumble of many buyers; but if your deposit is under the minimum amount required by your lender to avoid LMI, usually around 20%, you’ll have little choice in the matter. Without paying the LMI your lender won’t release the funds you need to buy your property.
A main reason people pay LMI is because they have found the dream home and want to buy it now rather than keep saving and miss out. People also opt to take on the cost when the market is rising dramatically and they want to purchase before property values climb too high.
How is LMI calculated?
The cost of LMI depends on how big your deposit is and can end up being quite costly, so it is important to crunch the numbers in advance. LMI premiums will differ between lenders and can be quite complex. To calculate the fee, you will need to work out the percentage of the property value that you need to borrow, this is known as a Loan to Value Ratio (LVR). You will also need to know the LMI premiums of your lender.
These days there are plenty of online calculators, which will give you a good idea of the cost depending on your circumstance. But based on industry averages* if you have a 10% deposit on a property of $500,000, LMI is approximately $7,920. If you want an accurate idea of what you will be paying the best way to find out is to talk directly with your lender. (Based on 2018 data).
Why is it a charge at all?
LMI acts as a security to the lender, when it considers you a ‘high risk’ borrower. Typically, if a bank has to lend you more than 80% of the sale price there is less of a safety buffer, so they want insurance. Usually, the less money you have for your deposit, the more the LMI will cost. Remember, LMI protects the mortgage lender in the event that you, the borrower, defaults on their loan, it does not protect you.
If you want protection for loss of income or death this is called Mortgage Insurance and is a different product. The good news is you don’t need to waste time shopping around for LMI as the bank will use their own insurance provider.
Can I avoid it?
Yes, you can save for a bigger deposit. This can be the conundrum for buyers as you risk paying considerably more for a home in a rising market. Also, high loan terms (borrowing 90% of your property’s value) most likely means you’ll pay more money in interest over the course of your mortgage.
It’s worth asking yourself, is saving for a larger deposit an option?
A larger deposit means you’d borrow less and therefore pay less interest over the course of your loan, but it also means delaying your purchase. If the market is strong prices could rise, and so paying LMI now could be cheaper than the extra dollars needed to secure a property in a year’s time.
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